Secondary life sciences cities stay the course in the face of economic headwinds

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With the threat of a recession looming on the economic horizon coupled with worrisome forecasts of funding cuts for life sciences companies, emerging geographic markets across the country are in some cases better positioned than their peers. more established to weather the impending storm.

Downturns can be particularly dangerous for emerging markets, especially in life sciences, where risk is particularly high and long-term investments in larger developments. In late April, Alexandria Real Estate Equities President Joel Marcus spoke of a coming era of “haves and have nots” biotech favoring established companies and markets.

But lowering barriers to entry and growing talent pools in smaller markets can help insulate them from the turbulence ahead, especially those that have been successful in attracting major development players.

Courtesy of Elkus Manfredi Architects

An aerial rendering of TMC3, a 37-acre life sciences campus at Texas Medical Center in Houston.

JLL’s Executive Director for US Life Sciences, Travis McCready, predicted significant performance in markets like Dallas, Philadelphia, Los Angeles and Seattle. Landlords who aren’t life sciences-focused may struggle or walk away, but established players, like Alexandria, BioMed Realty and Oxford Properties, will continue to build in second-tier cities, he said. declared.

“There hasn’t been a pullback, generally speaking,” McCready said, alluding to market strength and continued strong demand for lab space.

“Long-term owners of life sciences understand that this is not a one-year or three-year market,” he said. “It’s a seven- or 10-year market. They’re ready to absorb macroeconomic shocks like this.

All in all, McCready isn’t ready to panic just yet.

“If you take 2021 out, the market is on track to perform at higher, even historic levels,” he said. “Rental momentum, risk capital, all of the key metrics we use to measure market strength are at par with 2019 and 2020 levels.”

Dan Belldegrun, whose $3 billion Breakthrough fund plans to invest in established and emerging markets in the US and UK, said in May he saw potential for those markets to continue to grow and to become “booming life science groups”. by talent and academia.

In Houston, where the economy has long been dominated by energy companies and where industry diversification is welcome as economic uncertainty persists, long-term regional players like the TMC3 project and the Texas Medical Center have made significant investments.

While the city’s life sciences market isn’t necessarily “hot,” there hasn’t been a slowdown in activity, said CBRE Senior Vice President Scott Carter, who specializes in health care life sciences in Houston. bisnow. And the industry’s moderate pace of development aligns with the city’s goals.

“We’re not trying to be a Boston or a San Francisco right now,” Carter said. “We’re trying to grow at a smart pace right now. That’s bite-sized compared to those other markets. We’re not going out on our skis with the amount of purpose-built facilities we’re building right now.

Overall, Houston’s low inventory of labs relative to demand means the projects currently underway still have potential, even with a temporary dip in demand.

Carter is looking to 2023 and 2024, after the completion of major projects like Hines’ Levit Green development, for the market to really take shape.

Turbulence in 2022 isn’t something he worries too much about in the long run. CBRE’s recent Life Sciences Talent Report highlighted the city’s pool of highly skilled talent and the industry’s best wage and cost-of-living match in the nation.

However, in these smaller markets, it doesn’t take much to derail the progress of the industry as a whole, according to Colliers research director Aaron Jodka.

In smaller markets, when a big project goes off the rails, it can have a domino effect on other developers, Jodka said. He hasn’t seen the evidence yet, and with vacancy rates still low and demand high, there aren’t as many compelling reasons to halt an ongoing project.

“Long-term plans can be more volatile, but short-term construction, I wouldn’t expect a lot of change there,” he said.

McCready also sees emerging markets splitting in tiers in terms of attracting talent, particularly when it comes to IT and engineering talent.

Markets like Boulder, Colorado and Salt Lake City will see significant growth due to the wealth of IT talent, which he says will play an increasing role in the development of biotechnology. Markets struggling to produce scientific and technical talent will fall behind.

For their part, startups have started to act more conservatively with their expansion plans.

Funding concerns are showing up in smaller leases and more sublease space. JLL data shows significant jumps in the first two quarters of 2022 in the amount of available sublease space: 43.6% in the first quarter and 29.7% in the second quarter.

McCready estimates there is now approximately 2.1% sublease availability, or just over 3 million SF available, in the Boston, Seattle, San Diego, San Francisco, Washington, DC-Baltimore markets. and Research Triangle Park in North Carolina.

Rents haven’t come down, but the temporary inflection in the market allowing this little extra space is helping potential tenants at a key time.

The availability of more prime lab space in the market nationwide is actually helping small early-stage startups move into larger, better-quality Class A labs earlier in their life cycle. life.

Those who can get financing in a slightly tougher market now have more room for growth. In Philadelphia, for example, there is significant rental activity in smaller spaces and incubators.

Overall, startup funding is going “back to basics,” he said. The slowdown, relatively speaking, is due to what he calls a recalibration of biotech companies, which in recent years have benefited from overly exuberant markets in the form of overly generous valuations or fundraisings. This can give small businesses and markets an extra boost.

“It’s incredibly positive for the future growth of the industry as a whole,” McCready said.

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